Peter Lynch was a famous fund manager who achieved a 20-year average return greater than any other mutual fund manager on record. Lynch turned his Magellan Fund from just $18 million in assets to over $14 billion in assets between 1977 and 1990.
When he retired, his fund had over 1,500 stock positions.
However Lynch is best known for his invest in what you know investment strategy. He believed ordinary investors could beat Wall Street analysts with basic maths and knowledge gained as a consumer.
One of the most prominent valuation techniques he popularised was the price-earnings growth ratio, or PEG ratio. It is computed by taking the price-earnings ratio and dividing it by the forecast growth in earnings per share (EPS).
A result less than one indicates possible undervaluation while a result greater than one indicates possible overvaluation.
For example, Woolworths Limited (ASX: WOW) is expected to grow its earnings per share by approximately 5% in the next year and trades on a price-earnings ratio of 18. Therefore, it has a PEG ratio of 3.6.
3 companies possibly undervalued…
G8 Education Ltd (ASX: GEM) is a childcare centre owner and operator with over 360 centres through Australia and Singapore. It's grown exceptionally well over the past two years but trades on a PEG ratio of 0.40.
Mayne Pharma Group Ltd (ASX: MYX) is a pharmaceutical company which develops and manufactures branded and generic products to sell in global markets. With analysts' expectations for the company to report EPS of 4.6 cents in 2015, it trades on a PEG ratio of 0.53.
Lastly, Northern Star Resources Ltd (ASX: NST) is Australia's second largest gold miner. It has enjoyed a spectacular rise in price over the past year thanks to its ability to take advantage of the falling gold price by acquiring new projects from distressed companies. It has a PEG ratio of just 0.14.
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Of the three companies here I think G8 Education is the best buy at today's prices.
